Energy

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Nobody likes being outshone by a rival -- especially if all they've done is copy your idea.

Take EON. Back in 2014, the German utility had the foresight to separate its renewable and grids businesses from its loss-making fossil power plants. Rival RWE dragged its feet for a year before copying EON.

Both companies have been hit by a toxic combination of falling wholesale power prices, less demand for fossil power and Germany's decision to shut down nuclear plants.

Embarrassingly for Eon, RWE's version of the plan turned out to be much the better one.

Electric Shock
Eon's shares have underperformed RWE's this year
Source: Bloomberg

Last week, RWE raised 5 billion euros ($5.5 billion) by selling a 25 percent stake in its grid, renewable and retail unit, to investors.  Innogy will get 2 billion euros of the proceeds to fund renewable investments. In contrast, EON's spin-off of its fossil power business into a business called Uniper didn't raise a cent.

Unlike RWE, EON couldn't detach the renewables business from its massive nuclear liabilities. Uncertainty around the final size of those liabilities made prospective investors nervous. EON's split now looks like a missed opportunity to unlock value and raise capital at a fair price. At the start of the year, its market value was more twice that of RWE. Today, Innogy alone is worth more than Eon. 

Separation Games
Innogy is now worth more than Eon following its IPO last week
Source: Bloomberg
NB Eon span off 53 percent of Uniper to existing sharedholders and kept the other 47 percent. RWE's equity value is smaller than its holding in Innogy in part because of its nuclear liabilities.

It's not too late for EON CEO Johannes Teyssen to refine his strategy. German magazine Wirtschaftswoche reported on Thursday the company is considering plans to find a buyer for or sell shares in at least part of its power grid business. 

EON played down that report -- but it shouldn't rule it out. Shareholder Knight Vinke is said have favored such a move and it's easy to see why. 

The Innogy IPO demonstrated that shareholders are willing to pay a premium for regulated grid assets that have fairly predictable returns, so long as those assets aren't encumbered by legacy businesses. 

EON's shares remain in the doldrums because its shareholders are worried about the roughly 10 billion euros of liabilities linked to its ageing fleet of nuclear reactors, and the likelihood the company will need to raise fresh capital.

Analysts expect it will need to raise slightly more than 2 billion euros once the nuclear matter is settled. 

There's no question EON needs the money. Shareholders' equity could be wiped out when it reassess the book value of its remaining Uniper stake next month. The Uniper assets are valued at about 12 billion euros in EON's accounts and Uniper's market value is only a third of that. 

Equity Erosion
Eon will probably have negative shareholder equity after a writedown of its Uniper stake
Source: Kepler Cheuvreux

But raising money when your share price is so low is painful for shareholders who get diluted. The sale of part of the grid business might produce more value at a better price. Analysts at Jefferies think selling a 20 percent stake in the grid business to money managers could raise 2.3 billion euros.  

RWE didn't shy away from copying a good idea. Now it's EON's turn.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net